Canvas for the Innovative Mind

blog navigation

blog posts

Why Barnes and Noble's Strategy Makes Perfect Sense?

A few months ago, Netflix separated the DVD-by-mail and video streaming services into two companies. Netflix reversed the decision quickly and abandoned the decision to spin-off the DVD-by-mail business. Rajshree Agarwal and I wrote an op-ed piece in the Baltimore Sun opposing this decision from a strategy point of view.

Money quote:

DVD-by-mail and video streaming services had different value propositions, different benefits and different cost structures. One pricing model for both formats created pressure within the organization and exacerbated the inconsistencies between the two business models. The best approach to a new technology may have been to be ambidextrous from the get-go and to think through which capabilities and strategies were synergistic and which ones were at odds with each other.

Now here is an example of a company that is doing this right. Barnes and Noble (B&N) announced this week that they will create a new subsidiary called Newco that will bring together the digital and College businesses of Barnes & Noble. Microsoft will make an initial $300 million investment in Newco in exchange for an approximately 17.6% equity stake. B&N gets the capital to compete against Amazon and Apple while Microsoft gets an entry into the digital books and magazines markets. Interestingly, the valuation of this digital subsidiary is two times more than the entire market cap of B&N underscoring the decline of the retail book business. B&N may spin-off this new company or create a separate public company. Because the brick and mortar and click and mortar businesses require separate business models, splitting these two businesses makes perfect business sense.

_________________________Raj EchambadiProfessor of Business Administration and James F. Towey Faculty Fellow and Executive MBA Academic Director